Competition in the tertiary education market

12th September 2014 · Brian Parmenter

Governments are increasingly moving towards market-based models for the delivery of health and education services, for a variety of reasons. In part, increased competition and contestability between public and private providers have the potential to deliver improvements in efficiency, innovation and choice. The 2014-15 Commonwealth Budget was the unexpected vehicle through which such reforms are being proposed for the higher education sector.

Under the Commonwealth government’s proposed reforms to higher education, TAFE colleges and accredited private providers will be able to compete with established universities for students supported by Commonwealth funding. Together with fee deregulation, this will make competition policy a big issue for the higher-education sector.

Competitive-neutrality

Historically, competition policy has applied to universities’ non-educational activities but not to most of their educational activities.

Where universities provide services regarded as commercial from a competition-policy perspective - 'competitive-neutrality' requires that their status as public institutions does not allow them to compete unfairly with private-sector providers. This requires universities to charge full cost for their commercial activities and not to subsidise them using income that they receive (explicitly or implicitly) by virtue of their public status, including their tax status. The trickiest issue is that full costs should include a commercial return on the physical (and perhaps intellectual) capital that universities use in supplying commercial services.

There is no obvious reason for not adopting a similar approach to universities’ educational activities that the government’s proposed reforms will render 'commercial'. If such an approach is adopted, the competition regulator will have to determine the capital base to underlie a university’s full-cost charging. An economist would say that this should include the opportunity value of the university’s publicly provided assets, including real estate.

This raises the issue of fair competition not only between established universities, TAFE colleges and new private-sector competitors but also among established universities – doesn’t fairness (or economic efficiency) require that universities with prestige locations should have to charge the opportunity cost of using them when competing with universities that have only much less-valuable real estate at their disposal?

The well located universities might be happy to charge more realistically once government restrictions on fee levels are lifted. But what should the government’s response be to the explicit monetisation of their publicly provided assets?

Implications for government subsidies

In its submission to the Harper Review of competition policy, the Council of Private Higher Education (COPHE) claims that government funding of university students should not discriminate between public universities and other accredited providers. COPHE proposes a 'competitive neutrality levy' on public universities to account for the value of their use of publicly provided assets. Hence, public universities would receive a smaller cash component than other providers. The attractive logic of this proposal implies that the size of the competitive neutrality levy should differ between public universities – it should be bigger for universities with prestige locations than for less-well-sited universities. But competitive neutrality cuts both ways, and in setting fees public institutions should account for the costs as well as the benefits of being public entities in their fees.

Setting subsidy rates to account for all relevant factors is complex. What is the rationale for the recently announced Commonwealth rates that distinguish only between universities and other providers and give a non-university provider only 70 per cent of what a university receives?

Other competition policy issues

A number of other issues will arise if competition policy is applied widely to universities’ educational activities. First, there are potential perceptions of collusion in setting fees.

The discussion of pricing strategies, and the sharing of pricing information through peak bodies or between heads of faculties could be interpreted as price signalling or cartel behaviour

Collaborative delivery, originally intended to promote efficiency and/or quality, could be construed as carving up the market

Exclusivity between pathway colleges and tertiary providers may amount to primary or secondary boycotts.

Institutional mergers and acquisitions may need to be considered carefully by the competition regulator. Such scrutiny could even extend to the mergers and acquisition of individual campuses. UQ’s recent sale of its Ipswich campus to USQ, for example, appears to firmly secure USQ’s dominance in the corridor from Springfield to Toowoomba.

Transition to full deregulation

The most significant issue for policy makers is to determine whether competition in segments of the tertiary-education market is sufficient to support immediate transition to full deregulation; the government’s own Regulatory Impact Statement flags the likely absence of competition in medical degrees. Where competition is weak, fee capping and other instruments may be needed to protect the public interest. In its review of VET fees and funding in Victoria, the Essential Services Commission proposed that an independent body should determine whether particular markets are sufficiently competitive to support fee deregulation.

Most market participants have a strong interest in working with the Commonwealth government to ensure that higher-education reform delivers a genuinely level playing field and that privileged incumbents do not retain unfair market positions, to the ultimate detriment of future generations of students.